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The top three benefits of early FRTB preparedness

By Andre Burrell, Director Industry Solutions for Cloud, Banking and Capital Markets, Microsoft on August 8, 2017

Filed under Financial Services - Banking & Capital Markets

When faced with a herculean challenge like Fundamental Review of the Trading Book (FRTB), it’s hard to see past all the uncertainty that lies ahead. Regulatory guidance is unclear and banks must make many tough decisions in a short amount of time – decisions such as whether to build or buy the technology needed to meet FRTB compliance. Although the obstacles are daunting, banks that proactively adapt will see potential capital benefits and achieve competitive advantages. Let’s take a closer look at the top three benefits of taking a proactive approach to FRTB.

1. Optimize capital efficiency of trading desks

Early adopters will have more flexibility and more options than those who wait until the last minute. This additional time to prepare is especially critical when optimizing trading desks. Banks need to use one of two modeling approaches for each desk, the Internal Model Approach (IMA) or Standardized Approach (SA). To strategically choose between the two approaches and maximize capital efficiency, thorough “what-if” assessments must be run to determine the impact on each desk and the business as a whole. Additionally, “what-if” exercises enable banks to analyze and reconfigure the products being traded by different trading desks to create a more optimal trading structure under the new regulation. FRTB compliance will have far-reaching effects on businesses – so getting started early enables banks to make strategic decisions instead of tactical ones.

2. Beat the regulatory queue

As the 2020 FRTB deadline nears, an avalanche of firms will be clamoring for regulators’ approval of their modeling approaches. Early adopters will get ahead of this barrage instead of being stuck in the middle of it. Beating the queue gives banking teams additional time to work closely with regulators, which will be especially beneficial if implementation issues arise. As demands on regulators’ time increase, banks will get less face time with them and are more likely to be in a pinch if and when regulatory examinations don’t go as planned. Proactively working toward a solution and engaging regulators early gives banks the best shot of knowing they will be compliant with a well thought out, thoroughly vetted, optimal solution in place – rather than placing their hope in a last-minute, hacked together system.

3. Achieve first-mover advantages in the market

There are many first-mover advantages in the marketplace for early adopters of FRTB, especially for trading desks that receive IMA approval. A proactive approach empowers banks to provide feedback to regulators on how FRTB is affecting their business and potentially shape how FRTB is implemented in their local market. Early IMA adopters will have a competitive edge in the market versus trading desks using SA due to their Lower capital costs. This lower cost base will improve trading profitability and enable the desks to price trades more competitively, helping them gain market share at competitors’ expense.

If you haven’t started adopting yet, there’s no time like the present

FRTB will have a large impact on every financial institution’s business, and banks need to be sure they are approaching readiness and compliance in the most effective way. Numerix FRTB, built on Microsoft Cloud technology, enables banks to conduct an early stage impact assessment to understand how FRTB will affect their business going forward. The solution’s high-performance, cloud-based risk engine provides the computational power needed to calculate the tremendous volume of daily simulations FRTB requires while helping banks use capital more efficiently, improve executive visibility into capital requirements and risk, and achieve greater confidence engaging with regulators.

A wait-and-see approach to FRTB-readiness is likely to inflict pain on the bottom line of the business, so a “hack and hope” strategy is extremely risky. Being aggressive and getting started on FRTB now enables banks to take definitive, logical action toward optimizing their business model. Drastic organizational changes should be well-informed and data-driven, rather than a guess. Check out the Numerix FRTB demo on Microsoft AppSource to see the tools they offer to conduct a thorough analysis and get started on a path to early readiness.

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